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What do you think of Costco's Special Dividend?

Earlier this week Costco (COST) announced a $7 special dividend payable to shareholders in December. The idea behind it is to give shareholders an extra bonus prior to the potential dividend tax hike. Several other companies have announced special dividends but Costco's will cost just over $3 billion. Costco is a solidly run company that continues to grow. I've never been to a Costco because where I live Sam's Club dominates the bulk shopping arena.

There's a few issues that I have with the special dividend. One, who knows what is going to come from the "Fiscal Cliff" negotiations so they're paying this for something that might not have any change at all. Two, in order to pay for the special dividend they're having a $3.5 billion debt offering. So the company is essentially going further into debt just to pay a special dividend. I know that companies have access to very cheap money but still taking on debt just to pay shareholders confuses me. Three, while some shareholders are celebrating the special dividend most of the owners that are truly benefiting from it are not the individual investor. It's the inside owners and large institutions. The co-founder, Jim Sinegal, owns around 2 million shares. That's a $14 million payout in December on top of the regular dividends they've declared so far this year. If the dividend tax rate does increase due to the Fiscal Cliff, it's definitely increasing on his tax bracket and potentially might not on the smaller individual investor.

What do you think of Costco paying for the special dividend by having a debt offering to pay for it?

When I first heard about it I thought it was really nice of them to do this. But then I looked into it more and was put off by them going into more debt just to pay the special dividend. I would be more understanding if they were taking on some cheap debt to fuel expansion because money is super cheap for companies right now, but just to pay a dividend doesn't make sense to me.

I was working for Dean Foods when they did this exact same thing about 7 years ago. They took on a massive load of debt to pay a $15 one time dividend. At the time I thought it was a horrible move for the company. Turns out it was. DF went from a $60+ price to down to around $7.50. The interest about killed the company. They ended up having to sell some stock to pay down the debt. The CEO owned 2 million shares so it was a nice $30 million payday. Most of the small shareholders were so much worse off after this deal.

That's interesting that there's a fairly recent precedent of the same thing. I'm not sure how Dean Foods was at the time but I think Costco can absorb this, it just doesn't make any sense to me. Cash on hand would be one thing but taking on extra debt for no purpose other than paying a dividend is crazy. Unfortunately it's the small shareholders that are rejoicing after the announcement but it's the insiders and institutions that are really making out like bandits by deals like this.

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